YOU SAID IT

P.A. is Marty’s law firm sub S, of which Marty was sole owner. He was also an officer and director, and always treated himself as an employee.

I’m inferring here, but it sounds like Marty was playing the sub S dodge. That’s where the Sub S employs its owner, pays him some wages (with W-2 and withholding to match), and treats the rest of the earnings as profit (dividend to owner, but no W-2 and no withholding).

IRS stomps these moves by treating the profits as wages and claiming unpaid FICA-FUTA.

But all Judge Nega has to tell us is “… respondent sent petitioner Forms 4668, Employment Tax Examination Changes Report, which (1) concluded that petitioner failed to report reasonable wage compensation paid to Mr. Azarian…, (2) proposed that petitioner should have reported $125,000 in annual wages to Mr. Azarian…, and (3) concluded that petitioner was therefore liable for proposed employment tax increases and additions to tax…. Respondent did not issue petitioner a Letter 3523, Notice of Determination of Worker Classification, with respect to the taxable periods at issue.” Order, at p. 2.

P.A. petitions. IRS says no jurisdiction, because this isn’t a reclassification case. Marty was always an employee, and neither he nor P.A. ever said otherwise.

Section 7436 gives Tax Court jurisdiction when there’s a dispute over IC-vs-EE status in connection with an audit. OK, here there was an audit. And both sides agree that the relief for habitual erroneous EE classifications in Section 530(a) of the 1978 Revenue Act isn’t in play here.

“Petitioner consistently treated Mr. Azarian as an employee for the taxable periods at issue. Therefore respondent did not make a determination that Mr. Azarian was an employee of petitioner, but rather concluded that petitioner failed to report reasonable wage compensation paid to Mr. Azarian…. Section 7436(a)(1) only confers jurisdiction upon this Court to determine the ‘correct and the proper amount of employment tax’ when respondent makes a worker classification determination, not when respondent concludes that petitioner underreported reasonable wage compensation, as is the case here.” Order, at pp. 2-3 (Footnote omitted, but read it; it discusses the case that was the subject of my blogpost hereinabove referred to).

An author, teacher, advocate and trusted advisor, Lew Taishoff is a New York City-based attorney with 51 years of experience in corporate and individual tax and real estate matters. He is an Enrolled Agent, examined and admitted to practice before the Internal Revenue Service, and admitted to practice before the United States ... Continue reading →